The UK's November CPI "cooled down" more than expected, and the Bank of England cut interest rates on Thursday as a "final boost".

The UK inflation rate fell to its lowest level in eight months, exceeding expectations, leading traders to believe that the Bank of England is almost certain to cut interest rates on Thursday. The UK Office for National Statistics said on Wednesday that the November CPI rose by 3.2% year-on-year, lower than the previous month's 3.6%, primarily due to a drop in prices of items such as cakes, biscuits, and breakfast cereals, lower than economists' expectations of 3.5% and the Bank of England's forecast of 3.4%. At the same time, the core CPI in November rose by 3.2% year-on-year, lower than the previous value and the expected 3.4%. As an important indicator of the domestic economic situation, service prices rose by 4.4%, slightly better than the Bank of England's previous expectation of a 4.5% increase. After the data was released, the pound fell by 0.7% against the US dollar to 1.3322, with investors betting that borrowing costs will decrease in the coming months. The market has already fully priced in two rate cuts before the end of April next year. Paul Dales, Chief UK Economist at Capital Economics, said that the speed at which inflation is fading is far beyond everyone's expectations. He added that this cooling is "certainly enough to prompt the Bank of England Governor to open his 'big gift bag' tomorrow, giving borrowers an early Christmas present - a rate cut." These data provide the Bank of England with the latest understanding of inflation pressures before making a decision on Thursday. It is expected that Bank of England Governor Andrew Bailey will make a decisive vote at this week's meeting, while the other members of the Monetary Policy Committee are evenly split between hawks and doves, with four seats each. Although the Monetary Policy Committee did not take any action in September and November, signs of a decline in inflation and the economy have gradually emerged since the last meeting. Data released on Tuesday showed that the unemployment rate rose to 5.1% in the three months to October, the highest level in nearly five years. Private sector wage growth fell below 4% for the first time since 2020. Additionally, data released on December 3 showed that the growth of the service sector in November slowed, employment numbers saw the largest contraction since February, and new orders declined for the first time in four months. Some businesses interviewed indicated that the uncertainty surrounding the Autumn Budget announcement by Chancellor Rishi Sunak had led them to postpone new investments. Interviewed companies also stated that weak consumer and business confidence were having an adverse effect on economic growth. The employment report on Tuesday also showed that the number of employees on payrolls had decreased by more than 187,000 since the government's first Budget statement, the youth unemployment rate had risen to 13.4%, the highest level in over a year, and the number of unemployed 18 to 24-year-olds in October reached nearly 550,000, a high not seen since 2015. Furthermore, data released last Friday showed that the UK economy contracted for the second consecutive month in October. Chancellor Rishi Sunak welcomed the decline in CPI on Wednesday. She had stated that her Budget, which includes freezing rail fares, reducing household energy bills, and providing fuel duty rebates for drivers, aims to reduce the cost of living for voters. Initial analysis by the Bank of England indicated that these policies could lower the annual inflation rate by up to 0.5 percentage points in the spring of next year. Analysis suggests that due to the significant slowdown in inflation in November, it is almost certain that the Bank of England will cut interest rates in December. Looking ahead, although potential cost pressures may take longer to ease, the annual CPI for 2026 may quickly fall. Another data released by the UK Office for National Statistics showed that some pipeline price pressures eased, with factory gate prices rising by 3.4% in the year to November, down from the two-and-a-half-year high of 3.6% reached in October. This slowdown was mainly influenced by food prices. However, production input prices continued to rise, with fuel and material costs rising by 1.1% year-on-year, the fastest pace in twelve months. Imported goods prices (which account for about a quarter of UK production inputs) rose by 1.3% over the past year. This increase partially reflects the depreciation of the pound, but so far, there is little evidence to suggest that US President Trump's tariff policy has led to discounted goods flowing into the UK. Bailey, who stood alongside hawks in the Monetary Policy Committee in November, said he needed more evidence that price pressures were easing. This time, however, with more signs indicating that the UK economy is struggling in the second half of the year, it is expected that he will side with the doves on Thursday. Additionally, data released on Wednesday showed that pressure on price increases had eased across the board, with only prices for communication commodities rising. The food inflation rate dropped from 4.8% to 4%, and the price increase for tobacco and alcohol also decreased from 5.9% to 4%. Due to the significant discounts during "Black Friday" sales promotions by retailers, prices for clothing and footwear fell by 0.6% year-on-year. Thomas Pugh, Chief UK Economist at RSM, said, "With the tobacco tax taking effect, food prices likely to rebound, and the end of Black Friday promotions, inflation may rebound slightly in December. But besides signaling the possibility of a rate cut tomorrow, today's sharp drop in inflation also opens the door for another rate cut early next year, especially with the labor market continuing to be weak."